Anyone who is about to take a mortgage (or has already taken one), must know the difference between a safe mortgage and a risky mortgage. A risky mortgage may not be a concept that people often use, but it is there and it exists. And what is even more important – those who understand this, can take quite a few steps to avoid getting there.
Unprecedented – over a million mortgages in Israel
It is difficult to define the average Israeli, but according to the mortgage data in Israel, it is possible to come up with an interesting definition of this Israeli. According to Bank of Israel data for the end of 2022, we have reached an unprecedented situation where almost one out of every two families in Israel has taken out a mortgage and has not yet finished it. Therefore, it can be said that the average Israeli is someone who dreams of an apartment and understands that the way to get there is through a mortgage. When so many Israelis and so many Israeli women are paying a mortgage these days (which, according to all signs, is only going to increase), there is a significant percentage of people who are dealing with a risky mortgage. It must not be ignored, because the consequences can be severe.
A risky mortgage and the third rule
In light of the recent increase in the prime interest rate , the average mortgage repayment has jumped by hundreds of shekels and more this year. This causes a significant percentage of the public to recalculate a route, and declare that the prime route is dangerous. That is not accurate. True, the prime interest rate , which jumped dramatically this year and has already reached 4.75 percent, surprised many who were used to the fact that the prime mortgage route is excellent (because it is an extremely low interest rate). So first of all, this lesson is important, because it teaches that a prime mortgage route is not always the greatest bargain. It has advantages, it has disadvantages. The fact that the prime can jump and make the mortgage go up, does not make this route dangerous. A risky mortgage means a mortgage with a monthly repayment that you as a family have trouble meeting over time. And according to the calculations of finance and financing experts, there is a fairly precise definition of a risky mortgage. Know the thirty percent rule or the one-third rule.
The 30 percent rule states this: as soon as the monthly mortgage repayment exceeds thirty percent of the household’s net income, it is a potentially dangerous mortgage.
For example, the Cohen family of Petach Tikva earn together net, salary plus child allowance, NIS 15,000 per month. 30 percent of this amount is equivalent to NIS 4500. If the monthly mortgage exceeds this amount, it is a risky mortgage. The reason for this – a mortgage is a type of fixed expense. You cannot ask for a discount. If you do not manage to live the month, you cannot give up this expense in the same way that you give up, say, going to a restaurant or buying a new car (and are satisfied with a second-hand one). If you don’t pay the mortgage, the bank may foreclose on the house and in cases where that doesn’t help either, the house will be forcibly sold. The good news is that there is something to be done.
What to do if the mortgage has become dangerous
Along with rising interest rates and rising monthly repayments, many have recently woken up to find that their mortgage has become dangerous. But a mortgage can become dangerous even if, heaven forbid, the family is in financial distress due to layoffs or due to the collapse of a family business. So what do we do now:
- are not ignored. The first moment when you discover that it is difficult for you to pay the mortgage – don’t ignore it!
- The banks appreciate customers who initiate a proactive application to the bank, before falling behind on the loan. This makes it easier to reach an agreement and a solution.
- Don’t let the mortgage go into arrears. Interest on arrears is high interest and if you don’t comply, the bank may take the house.
- If necessary, ask the bank to redeploy. Divide one of the mortgage routes (eg prime), for a longer period of time. This is how the monthly payment is reduced.
- You can request a full cycle of the entire mortgage, which results in a reduction of the total monthly payment.
- Living according to a budget – changing financial conduct, building a family budget and saving on other expenses. Building reserves in savings can allow the repayment of part of the mortgage over time, in order to reduce the amount of the monthly repayment.